China is tipping billions into the chip sector, yet one of its most important semiconductor companies has just defaulted – for the second time in a month.

Tsinghua Unigroup, majority owned by the prestigious Tsinghua University, is set to miss payments on nearly $2.5 billion of international bonds, WSJ.com has reported.

This follows its default on a domestic bond worth 1.3 billion yuan (US$199 million) last month, one of a series of missed repayments that have unsettled China bond markets this year.

Analysts and investors interpret the Unigroup default as primarily a signal that the government won't be propping up unviable state enterprises.

But it's also a sign of continued trouble for China's ambitious efforts to charge up the semiconductor value chain.

China's economy is hooked on foreign semiconductors, importing about $300 billion worth per year.

Its domestic industry is capable of meeting at most around 30% of total demand, according to Dell'Oro. Approximately 40% of worldwide shipments are for the China market.

Unigroup's crisis is just the latest in half a dozen failures among China's chip companies in the past 12 months.

Unigroup, which had expressed ambitions to become one of China's memory chip champions, has been the target of investor skepticism for some time. Its free cash flow ballooned to minus 11.57 billion yuan ($1.77 billion) in the first half, and it warned in August that it faced large liabilities.

It now faces a restructuring that could take some time, Nikkei Asia reports.

Even more embarrassing was the collapse of Wuhan Hongxin Semiconductor, which had purchased from ASML China's only lithographic equipment capable of making 7nm chips.

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Despite RMB128 billion ($19.56 billion) in investor backing, Hongxin shut down in August without having produced a single wafer. Its expensive gear is now in the custody of its bankers. (See SMIC added to entity list as China sees chip mini-boom.)

Another is Dehuai Semiconductor, which was found to have invested just RMB4.6 billion ($702.3 million), well short of the RMB45 billion ($6.9 billion) it had promised. It entered bankruptcy in June.

The government's multiple and conflicting roles don't help. Besides playing corporate cop to enforce financial discipline, it is also the driving force behind the plan to create a globally competitive chip industry.

With RMB200 billion ($30.56 billion) poised to shower over the sector, it has helped set off a semiconductor investment boom.

In the first eight months of the year, Chinese semiconductor companies raised RMB66.2 billion ($10.1 billion) from IPOs, nearly six times the entire funds raised in 2019 and 42 times that of 2018, according to China News Weekly.

China now has more than 50,000 chip-related companies with 12,740 formed this year.

But some experts say the effort is too small and fragmented.

Joseph Xie, an associate professor at MIT and one of the founders of SMIC, says the volume of funds is not enough. "It's not too much to add a zero to the number at the end," he told China News Weekly.

Wei Shaojun, vice chairman of the China Semiconductor Industry Association, says R&D accounts for around 17% of sales revenue among US chip firms. In contrast, Chinese firms on average invest only around 8% of revenue.

— Robert Clark, contributing editor, special to Light Reading